Economies are Ecologies, not Engines

After ten years as governor of the Bank of England, Mervyn King is a quintessential insider with regard to macroeconomic policy. In The End of Alchemy, King expresses second thoughts about the orthodox analyses and prescriptions that he has supported in the past. Despite King’s newfound uneasiness with orthodox thinking, Lepage explains that King does not truly escape the grip of economic orthodoxy. Lepage’s review is both deeply engaging in his exposition of King’s second thoughts and significantly concerning in Lepage’s hesitation to pursue an alternative analytical path. There is nothing in Lepage’s critique about which I disagree. Yet Lepage does not explore possible constructive implications of his criticisms. I should like to set forth what I think are some constructive implications of Lepage’s critical analysis.

Economic Systems as Ecologies and not Engines

Orthodox economic thinking treats economies as engines, and this style of thought undergirds the macro orthodoxy from which King was unable to escape. Lepage seems to recognize the trap that macro orthodoxy presents, but seeks to blunt its teeth rather than to avoid it. To avoid that trap requires that we understand our analytical object in a reasonable way and not in the fanciful manner that accompanies orthodox macro theory.

An economy is a system of agents and connections among those agents. There are, however, two distinct ways of conceptualizing economic systems. One is mechanical, the other is ecological. The mechanical conceptualization, which King embraces and which Lepage criticizes without pursuing the alternative, construes agents as locked together in an equilibrium, possibly a good one and possibly not, but an equilibrium all the same. In sharp contrast, the ecological conceptualization treats agents as creative and imaginative, and not as parts in a machine. This simple change in analytical orientation ramifies throughout the domain of economic inquiry. The whole of an economy is constituted through continual interaction among often creative agents. An economy entails a relationship of parts to whole. Theorizing about the whole of an object entails a higher level of complexity then does theorizing about any single part of that object, especially when the parts are carriers of creative action.

Parades and piazzas are both social phenomena. Parades are mechanical, piazzas are ecological. These different objects call for different approaches to description and explanation. A parade can be reduced to a massed point and its progress followed on a map. A member of the parade might twist a knee upon pivoting, which leads the parade to stop momentarily. Such accidental shocks do not change the mechanical nature of the parade, but just remind us that mechanisms can misfire when one of its parts fails.

In contrast, the crowd of pedestrians passing through a piazza cannot be reduced to a massed point. The pedestrians are not traveling toward the same destination, nor do they travel at the same speed. Moreover, someone traveling along one direction might suddenly change direction, causing incidental bumping with someone nearby. Such disruptions are part of the normal operation of the ecological system that is a piazza.1

Economies are not mechanisms or machines. They are ecologies of plans, with the individual agents inside those ecologies continually looking to pursue new opportunities. At any historical instant within these ecologies, some plans are initiated and other plans are abandoned, while many plans created in the past continue to operate. The mere recognition that plans are created and abandoned as time elapses is sufficient for setting an ecological research program in motion, and for recognizing that variability is an inherent feature of economic systems.

Economic stability is a chimera created by equilibrium or mechanical theorizing. Such mechanical theorizing points to aggregate spending as the prime object of analytical interest. Once this theoretical move has been made, it is a short step to posit a public organization, called government, to keep aggregate spending steady. Hence, mechanical macro theory calls for some outside political agency, either a central bank or a treasury, to counteract what the theory describes as exogenous shocks. In contrast, an ecological macro theory points to plans and interaction among plans as the prime objects of analytical interest. To do this is in turn to recognize that it is the principles and conventions of human governance that are of primary theoretical significance.

Ecologically-oriented Economics versus the Centralized Mindset

The mechanical vision of an economic system portrays politicians and their economist advisors as mechanics whose job is to keep the economic engine running smoothly. This image propels politicians and their advisors onto center stage of the human drama, for they are the ones responsible for keeping the economic engine working well. Without doubt, this image helps to project political action throughout society. All the same, that image is false. It is false theoretically and it is false historically. That image embraces what Mitchel Resnick described as “the centralized mindset” wherein an observed orderliness is attributed to some ordering agent whereas it is really a manifestation of some self-ordering process.2

The image of mechanics and engines asks the listener to imagine an economy as a simple machine that is not working properly, and with a mechanic being necessary to keep the machine working properly. That image is as wrong as wrong can be. Economies are not machines. They are complex webs of interacting people who pursue their objectives in imaginative and creative fashion. Whether you are speaking of the global economy of several billion people or a national economy of many millions, there is no way that any politician or regulator can truly control phenomena of this complexity. A truly useful economics requires recognition of the inherent complexity of economic phenomena.

The standard narrative of economic history is of an equilibrium system buffeted by accidents that call for a mechanic to repair. Once it is recognized that economies are complex organisms and not simple machines, historical narratives need to be reconfigured. Look a moment at the so-called financial crisis that arose in 2008. Where some claim that the events of 2008 show the need for more regulation of credit markets, others claim that they show the need for less or at least different regulation. Both types of claim accept the image of policy mechanics, only they differ over which mechanic is better. In truth, the image of the policy mechanic is the basis of a deeper problem that speaks to the relationship between political and commercial enterprises.

Not so long ago, credit markets were organized largely through the private law principles of property and contract. A creditor faced the problem of creating a portfolio of loans that generated acceptable returns to the firm’s investors. In seeking to do this, creditors chose among applicants for loans based on beliefs about the reliability of debtors. A potential debtor whose reliability was questionable could offer to pay a higher interest rate or pledge collateral rather than having the application rejected. In any case, credit markets under private law operate through mutual agreement, and with the terms of those agreements emerging out of the search for mutual gains between debtors and creditors.

In contemporary times, public ordering has acquired a deep presence within credit markets. No longer is agreement between borrowers and lenders sufficient for making deals. Political officials have become participants in credit markets, only they do not seek to help commercial enterprises serve their customers and investors better. To the contrary, they seek to force commercial enterprises to serve the interests of political clienteles. In the U.S., for instance, creditors must now develop loan portfolios that conform to regulatory requirements regarding such things as gender, race, geography, and income.

Hence, some people will receive loans who would not have received them under private law. This situation requires in turn that other people be denied loans who otherwise would have received them. Hence, lenders will sometimes make politically mandated loans that they would not have made if credit markets were governed by private law. It further means that there will be a greater volume of commercial failure than would otherwise have resulted, and those failures will increase the amount of economic turbulence within a society.

The fact of the matter is that there is an incongruity between the operations of commercial and political enterprises.3 Commercial enterprises operate with their own capital, and have strong reason to use that capital to attain commercial success. Political enterprises operate with other people’s capital. For commercial enterprises, one can gauge success by comparing changes in market value. For political enterprises this is impossible. All that is left is to gauge success by holding popularity contests.

This is not to deny the presence of competition among political enterprises, including candidates for election. Indeed, such competition is generally intense in democratic political systems. The features of that competition, however, differ when it pertains to commercial enterprises rather than when political enterprises enter the competitive arena. In any field of human endeavor, open competition among contestants generally selects for superior qualities with respect to that field of competition. This does not mean that political enterprises are to be judged as equivalent to commercial enterprises. To make this claim would be to make a category mistake by treating the two forms of competition as identical when they are divergent.

For commercial competition, successful competitors are those who are particularly good at converting capital that investors supply into products that customers desire. By contrast, political competitors derive revenues through taxation and not by selling services. Moreover, political enterprises cannot engage in profit-and-loss accounting. Still, competition among political enterprises will select for some type of quality just as will competition among commercial enterprises. Those types of quality will differ, however, depending on the field of competition. For instance, there are excellent divers who are but ordinary swimmers, just as there are excellent swimmers who are only ordinary divers. A coach would not select a swimming team by watching the candidates dive.

Failure and Policy within an Ecology of Plans

For mechanically-oriented equilibrium theory, failures of enterprises are potential sources of concern that might call for corrective policy action. For ecologically-based theories, failures are a normal part of life within an ecology of plans. Within this ecology, there is continual volatility, with some businesses prospering while others fail, and with large firms today disappearing tomorrow or the day after, just as new firms emerge and quickly become gigantic. Economic life has a good deal of roughness and volatility, and by no stretch of the imagination is placid. Change comes from creative and imaginative actions from inside a society and not as the exogenous shocks about which orthodox macro theorists fret.

An ecology of plans entails turbulence because plans can interfere with one another, as when a new product takes away customers from an established business. This turbulence arises because there is no fictional presumption that there exists some pre-established coordination among plans. Instead, some plans fail while others do far better than their creators anticipated, injecting turbulence into the ecology in any case. The generally modest character of this turbulence can plausibly be attributed to the conventions of private property which operate to facilitate the efficient abandonment as well as revision of plans. An owner who closes an enterprise still faces strong incentives to liquidate that business in an efficient manner.

In Systems of Survival, Jane Jacobs explained that a well-working society requires both commercial and guardian modes of activity.4 Her distinction is not the same thing as a distinction between businesses and governments, for even businesses will engage in some guardian activities. In reflecting on what happens when commercial and guardian moral syndromes commingle, Jacobs coined the term “monstrous moral hybrids.” For instance, an auditor who covers over a theft for a fee from the thief is commingling commercial and guardian roles. As businesses become increasingly involved in politics and political enterprises come increasingly to participate in business, monstrous moral hybrids grow within a system of entangled political economy.

The human drama in which we all participate is improvisational and not scripted. There are, however, some time-honored principles that speak to the qualities of various possible dramas. Those principles place commercial and industrial activity in the foreground of the human drama, while putting political action mostly in the background. Over the past century or so, however, foreground and background have significantly reversed. It is now widely believed that politicians bear primary responsibility for the extent of flourishing within a society. This situation generates a simple but dynamic template that encapsulates the contemporary world. A problem arises, as with a large business failing or a politically influential group seeking to receive credit on more favorable terms. The resulting monstrous moral hybrids can keep those failing businesses going and rearrange the supply of credit, with the progeny of those hybrids diffusing throughout the society.

Save for dreaded diseases, the human body has a natural ability to recover from sickness. It is the same with societies and economies. Indeed, the prime teaching of economics until the arrival on the intellectual scene of Marxism and other species of socialism has been that societies have natural abilities to recover from whatever maladies might have afflicted them. In a similar vein, propeller-driven aircraft have natural stability properties. An aircraft that passes through a storm will be tossed up and down, but will continually move toward level flight. Should the pilot react to a dip in the nose by increasing the angle of attack, a stall and possibly a crash can result. Politicians and central bankers are not pilots of a ship of state, and yet they act as if they are. There is little that such figures can do to promote human flourishing other than to secure peace, keep taxes low, and administer justice tolerably well.5 In this manner, they would avoid inserting harm into society. All the same, a soberly realistic person would surely be pardoned for thinking that politically-induced turbulence will continue to be part of our economic experience, as will the parade of future policy mechanics offering to control the turbulence their predecessors helped to create.

Richard Wagner

Henri Lepagereplies:

Richard Wagner was, for many years, the collaborator of James Buchanan, winner of the Nobel Prize in Economics in 1986. In this capacity he played a leading role in the emergence of one of the most important contemporary theoretical revolutions in economics: the so-called “Public Choice,” namely, the economic analysis of public choices and of the state. He has specialized in the rational analysis of democratic processes and their economic and political consequences. I am particularly grateful that he also kindly agreed to respond to my essay.

Wagner gently reproaches me for not complementing my negative view of King’s writings with a more positive approach that would be more explicit about the alternative lines of analysis along which I made most of my criticisms. I happily admit the truth of this remark, and I thank him for having sent us a text which precisely fills this gap in a remarkable way. In a few pages he offers us an exceptional synthesis of the broad principles that underlie the originality of the epistemological approach of economists belonging to the so-called Austrian school of thought, so little known and so often caricatured by the proponents of mainstream economics.

It must be said that the economists of the Austrian school often do not make all the necessary efforts to facilitate communication with those who consider them a priori as the last survivors of a scientific species destined to disappear because of its critical attitude towards the imperialist excesses of the mathematical and quantitative approach applied to the human and social sciences. By proposing to conceptualize the Austrian approach as a vision of the economy based on a system approach of an ecological type (the latter term being understood as a science of the relations of living beings with their institutional environment, and not merely the natural one), being opposed to the mechanistic tradition of economic orthodoxy, Wagner proposes a language tool that should, one hopes, help restore a more open dialogue between the adherents of these two opposing traditions.

In my essay, I relied on the contributions of Austrian theory and its authors to challenge the relevance of King’s claims to refound the monetary and banking economy on foundations that, whatever he may say, remain firmly anchored in the soil of the most conventional orthodoxy. It is true that we must go further. But how? For a forthcoming issue of the Review of Austrian Economics in a programmatic text called “New Austrian Macro Theory,” Wagner and Paul Lewis provide valuable insights into the genuinely revolutionary tracks that they and some other authors are currently working, developing a genuine Austrian macroeconomics, based on extending the great Hayekian intuitions.6 I hope that one day soon I will have the opportunity to write a review of these works and that I may thus correct the shortcoming that Wagner rightly discerns in my critique of King’s book.

Richard Wagner is Holbert L. Harris Professor of Economics at George Mason University.

Henri Lepage is a French economist.

This perspective is pursued for economic theory generally in Richard E. Wagner, Mind, Society, and Human Action: Time and Knowledge in a Theory of Social Economy (London: Routledge, 2010); and for macroeconomic theory particularly in Richard E. Wagner, “A Macro Economy as an Ecology of Plans,” Journal of Economic Behavior and Organization 82 (2012): 433–44. &larrhk;

This incongruity is described as entangled political economy in Richard E. Wagner, Politics as a Peculiar Business: Insights from a Theory of Entangled Political Economy (Cheltenham, UK: Edward Elgar, 2016). &larrhk;